A Sour Note for U.S. : Japan’s Music Rental Stores Cause Discord

The cramped Yu & Ai (friendship and love) compact disc store in a west Tokyo neighborhood hardly looks forbidding. Yet this store--and the 5,800 others like it in Japan catering to young students and office workers--make up what the U.S. recording industry calls one of its biggest problems in the world.

Here, music lovers can browse through an enormous variety of selections by U.S. artists, from Mariah Carey and Madonna to John Mellencamp and Guns N’ Roses. For the uninitiated, the store assists with written explanations of such genres as reggae, hip hop and house--the ‘90s version of disco. Lists of new releases and the top 10 sellers in the United States are posted.

For about $2.50 apiece, customers can rent a disc and, for another $2.50, they can buy a blank cassette. Thus, with new releases costing about $25, Japanese music fans can rent and tape five CDs for the price of buying one.

To the store’s consumers, the rental system--which began in the early ‘80s--is a way to enjoy a variety of music on a limited budget. “It’s a waste of money to buy,” said one young customer, who refused to give his name or age.

To Fuminori Katakami, the proprietor of Yu & Ai, the system provides a bridge between Western music and Japanese audiences in a nation where radio stations and MTV-like music video programs are relatively limited.

“I like to think of my store as a service between record companies and young people,” the affable manager said.

But to American recording executives, the system represents a commercial leech sucking out hundreds of millions of dollars of sales and royalties lost to the U.S. music industry. Aided by two years of pressure from Washington, the industry successfully lobbied for limited protections--the right to forbid rentals for one year after release--which will take effect throughout Japan in January. Further, the industry is aiming to win what could amount to an outright ban on rentals through the multilateral trade negotiations--known as the General Agreement on Tariffs and Trade--now under way in Geneva.

“Japan is the only significant market in the world where record rentals are allowed,” said Jay Berman, president of the Recording Industry Assn. of America. “So a large number of Japanese consumers are getting their music through renting rather than buying, and that has a tremendous negative impact on our business.”

The stakes are considerable. Japan is the second largest market for recorded music in the world, after only the United States. Japanese consumers buy $2.9 billion worth of music annually, or 12% of the world market. About 30% of those purchases are foreign music, most of it American, according to both the Japanese and U.S. record associations.

The squabble does not exactly pit “Japan Inc.” against America. For the past 10 years, the Japanese recording industry has furiously fought the rental shops as well, through litigation and negotiation. The rental association, in the meantime, is upset with the Japanese government for “cheating” it in previous negotiations with the United States, and has sent its own emissary to Geneva to make sure its interests are protected.

Still, the Japanese government, the rental store association and record producers all have more or less agreed on a common stand--one the U.S. industry rejects--in an illustrative example of how business pacts are forged and consensus hammered out in Japan despite conflicting interests.

The Japanese want to give all record producers (both foreign and domestic) the right to royalties, or “equitable renumeration.” Currently in Japan, for up to a year after a record release day, record producers may forbid rentals. But practically speaking because of competitive pressures, they must allow rentals three weeks after the release date under a new pact with the rental association that went into effect in August. The royalty depends on the nature of specific releases, including the popularity of a particular disc. It is this standard of “equitable renumeration” that the Japanese government is pushing in the global trade talks.

But U.S. law and the current U.S. position in the GATT talks are markedly different. American record producers enjoy the right to forbid rentals outright and want to extend that right worldwide through the multilateral negotiations.

The Japanese rental group says the U.S. proposal would wipe out its 10-year-old industry. In addition, officials complain that only rental stores are being hassled, even though consumers can also tape music off television and radio.

“We are being made scapegoats,” declared Kohji Miwa, deputy manager of the Japan Record Rental Commerce Trade Assn. “Americans shouldn’t think they can apply their domestic regulations to the rest of the world.”

As GATT negotiators go head to head in Geneva, the more immediate question for the U.S. recording industry is what will happen in Japan after Jan. 1. That’s when a new domestic law takes effect granting foreign record producers the same protection the Japanese industry enjoys: the right to forbid rentals for one year, after which the two parties must negotiate royalty payments. Foreign record producers now have no right to ban rentals or receive royalty payments.

Miwa, of the Japanese rental association, is blunt about his group’s plan of action after Jan. 1: mass violation of the law.

“In the worst case, the Americans will bring us to court,” Miwa said. “I won’t say it’s a war, but if they bring all the cases to court, imagine multiplying the number of American production companies by 6,000 rental shops. It will be much easier if Americans choose to make us partners instead.”

Such hardball tactics--along with pressure from the media and the government--are what persuaded the Japanese recording industry finally to seek compromise with the rental industry.

Akira Ojima, an attorney with the Ministry of International Trade and Industry, said it would be “difficult politically” to draft a new law permitting outright bans if the American position prevailed in the GATT talks. He added that American producers’ legitimate economic interests would be protected by royalties.

Although Berman of the U.S. record group said the royalty payments proposed by the Japanese would be a pittance compared to what a sale would bring in, Ojima and others said Japanese consumers would not necessarily buy if they could no longer rent and copy.